India’s gov’t struggles to halt rupee slide as financial crisis deepens

An Indian customer counts Indian rupee notes at a foreign currency exchange shop in Bangalore, India, Tuesday, Aug. 20, 2013. (Photo : AP Photo/Aijaz Rahi)

Indians returning from abroad bring nearly 3,000 flat screen televisions into the country a day, turning airport luggage belts into revolving electronics displays. A stiff new customs duty aims to sink that popular trade as officials scramble to halt a dizzying plunge in the rupee.

The 36-percent TV tax is the latest in a slew of measures the government has announced to steady the currency and is a sign, critics say, of its increasing desperation. New limits were imposed on the amount of money individuals and companies can invest overseas. Higher taxes were slapped on gold imports. Interest rates on rupee deposits were raised. All to no avail.

The rupee has plumbed new lows against the dollar on a near daily basis, showing the pressure of a current account deficit that has swelled from high import costs. A dollar now buys more than 63 rupees, a decline of 8 percent for the rupee so far this August. The Sensex stock index is down more than 10 percent in the past month. Nearly half that fall was in the past few days.

The government is panicked because the slumping rupee threatens to worsen two important barometers of the nation’s financial standing – its budget, already in deficit because of subsidized oil imports, and the overseas trade account, also deeply in the red.

“These are really piecemeal efforts,” said Anjalika Bardalai, a senior Asia analyst at the London-based consulting firm Eurasia Group. “They haven’t engaged in a big-bang reform to deal with structural problems still affecting the economy.”

Finance Minister P. Chidambaram defended the government’s efforts in parliament on Tuesday. To halt the rupee’s decline, he said the government is trying to stem demand for nonessential imports while also encouraging inflows of money.

Pessimists fear India could suffer a funding crisis like the one it experienced in 1990-91 when international investors took fright at its shaky finances. But with the central bank now stocked with $280 billion of foreign currency reserves, most experts think that scenario is unlikely.

What’s more probable is an extended period of India failing to generate fast-enough growth to either alleviate the poverty that still afflicts many of its 1.2 billion people or create enough new jobs for a population where a majority is under 30 years old and some 13 million Indians reach working age each year.

Some of the fall in India’s stock market stems from jitters about the U.S. Federal Reserve scaling back its unprecedented monetary stimulus. The Fed’s low interest rate campaign drove money into stock markets worldwide in search of higher returns, a phenomenon that is now reversing.

The Indian economy, Asia’s third largest, grew 5 percent in the financial year ended March, its slowest in a decade and well off the 8 percent pace it had averaged over those 10 years.

Growth suffered under the weight of high inflation, weak investment, corruption scandals and low business confidence. Efforts to open the country wider to foreign investment have been applauded but have yet to take deeper root.

“Five percent growth is not adequate for India, that’s for sure,” said Samiran Chakraborty, head of research at Standard Chartered Bank, South Asia. “With the kind of demographic profile we have, it’s quite likely we will not be able to satisfy the population with only 5 percent.”

In a small way, the soon to be squelched trade in flat screen TVs illustrates India’s business and economic challenges. Despite the massive size of its market and high import tariffs, local companies have not become significant players in the consumer electronics manufacturing industry.

Buying an imported 32-inch LED television costs up to $474 in New Delhi compared with $355 in Dubai or $330 in Bangkok, making the duty free exemption for individual air travelers a popular way to get a cheaper TV into India. That loophole closes Aug. 26. The Consumer Electronics and Appliances Manufacturers Association estimated 1 million TVs were brought into the country each year by individuals.

India’s prime minister is insisting the tough times are temporary, and that growth could recover to its previous breakneck levels. “We are trying our best to remedy the situation,” Manmohan Singh said in last week’s Independence Day address, attributing the economic malaise to the global slowdown.

The growth of past years “shows what we are capable of,” he said.<AP/NEWSis>